Total return strategy measures the performance of a security considering dividends and other cash distributions, capital gains and an increase or decrease in the net asset value (NAV) of a security, over a given time period, usually a year. The value of a security is the present value of expected stream of future cash flows that investors receive from the asset. The future cash flows are subject to the firms earnings and therefore they fluctuate from one year to another. Therefore, total return strategy informs the investor about the percentage gain or loss on a security compared to the purchase price.

Total return strategy can be calculated as follows:

Dividends + Capital gains distributions +/- Change in NAV) / Beginning NAV

Example

We need to calculate the total return of security X.

Data input

Dividend = $2

Capital gains distribution = $2

Initial net asset value (NAV) = 48

Increased net asset value (NAV) = $51

Plugging in the data in the formula we derive:

(2+2+ (51-48) / 42 = 7 / 42 = 16.7%

The total return strategy assumes that dividends have been reinvested in one year. It does not consider any sales charges that an investor paid to invest in a fund, or taxes they might owe on the income dividends and capital gains distributions received.

Portfolio diversification is a method that investors use to anticipate price changes that affect the net change in net asset value (NAV). A diversified portfolio allocates investment risk in different investment vehicles (stocks, mutual funds, bonds, and cash) offsetting losses from one asset with the gains in another asset of the portfolio. In doing so, investors diversify the risk even when investing in the same classes of assets with different expected rates of return. For example, an investor may choose to invest only in mutual funds but with diversified investment strategies, including growth funds, balanced funds, index funds etc. The third method of portfolio diversification is investing based on industry or regional allocation. In doing so, investors may invest in both domestic and international funds thus diversifying the risk of decreased rates of return due to industry recession or political or economic risk in a region.

Conclusively, total return strategy is a core portfolio strategy that seeks maximum return consistent with the preservation of capital and cautious risk taking.

About the Author:

A freelance writer, top MBA graduate with Finance major, passionate about business, finance, history and music; this is pretty much me in a nutshell. I provide high quality writing services since 2005 in the field of Business & Finance, Movie Reviews, Book Reviews, Health & Fitness, Internet and Relationships. I also have a very good knowledge of Politics and History. My advanced familiarity with financial modeling, financial statement analysis, capital budgeting and market research has helped me a lot, not only to be a successful professional, but mostly to see life under a more creative and innovative perspective. Besides, having lived for two years in Chicago, IL and Boca Raton, FL and for quite some time in Paris, France has provided me with an international aspect and has enlarged the way I see and understand life. I currently work as a financial and investment advisor at an international financial institution. Yet, my dream is to be able to make a living as a writer. You may find me at: http://christinapomonibusiness.blogspot.com/ http://christinapomonifinance.blogspot.com/ http://reviewsrevisited.blogspot.com/ http://thehistoryculturevenue.blogspot.com/

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